State Street Corp.'s decision to ease curbs on redemptions for investors with $67 billion in the firm's securities lending-related businesses should improve the company's prospects, even if it prompts near-term client departures or redemptions, industry observers say.
Company executives are pledging to lower the gates put in place more than a year ago, after the financial crisis of 2008 and early 2009 left securities lending collateral pools temporarily under water.
On July 7, State Street spelled out its plans in two separate client letters obtained by Pensions & Investments.
An unsigned letter from State Street Global Advisors to clients in collective trust funds that lent out their securities to garner incremental returns said parent company State Street injected $324 million into collateral pools those funds tapped, to bring their net asset value back to $1 a share.
As a result, restrictions put in place in March 2009, limiting redemptions to either 2% or 4% of a client's overall holdings per month, will be removed starting in August, Jamie Kase, an executive vice president and head of global sales and marketing with SSgA, said in an interview.
SSgA spokeswoman Marie McGehee said those funds totaled $15.57 billion as of June 30, down from roughly $24 billion Dec. 31 and $31 billion at the end of 2008. Asked about the decline, Mr. Kase noted that some of that client money flowed into SSgA funds that have similar investment objectives but don't lend out their securities. He didn't offer specifics.
The second letter said that in an effort to give securities lending clients greater flexibility, State Street will restructure a combined $51.6 billion of related investment trusts by the end of the year. That money will be divided into liquid pools, with no withdrawal restrictions, and longer-dated “duration” pools, which will permit withdrawals on an in-kind basis only. The letter was signed by Nicholas J. Bonn, the executive vice president heading State Street Corp.'s securities finance business.
That chunk of State Street's securities lending business — which doesn't include its much larger separate account client totals — was down 24% from Dec. 31, more than reversing a 9.1% gain for calendar year 2009.
The letter said the expected weighted average maturity of the longer-dated assets slated for the duration pools was 536 days as of June 30.